Where Do Correlations Go From Here?

While still elevated relative to historical levels, correlations among individual equities have fallen recently.  In macro-driven markets everything tends to move together, whereas in micro-driven markets there tends to be much greater dispersion in returns within the investment universe.  As you might imagine, the greater the dispersion in returns the more opportunity there is for relative strength strategies to really stand out.  Given the fact that we have been in a macro-driven market for several years now, I would not be surprised to see correlations drop from here.

correlation 2 Where Do Correlations Go From Here?

Source: The Leuthold Group

3 Responses to Where Do Correlations Go From Here?

  1. [...] Where do correlations go from here?  (Systematic Relative Strength) [...]

  2. Quinn Curtis says:

    Apologies, I’m a bit of a newbie to RS- I don’t understand the importance of such high correlation ratios (except of course the tautology that they all go up\down together). Is there a broader conclusion- eg, does the market have a positive\negative trend when correlations are high\low?

  3. Andy Hyer says:

    Macro-driven markets are just as likely to result in higher trending markets as lower, I suspect. For RS, greater dispersion in returns tends to create a better environment for providing outperformance.

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